Permanent Portfolio – Back to Basics
Feb 6th
Investing should be dead simple. Dead simple investing means sticking to the basics. This post I’m going back to the basics to help new followers of the Permanent Portfolio get a solid understanding of how the strategy works.
First, I recommend you listen to all of Harry Browne’s investment radio shows. Yes, there are a few dozen of them and it may take some time. But, if you are deciding on this investment strategy for your life savings isn’t it worth it to know all you can about it? I would hope so. I’d also hope you’d think the same thing for any strategy you choose to follow. These shows answer perhaps 99% of any basic question you may have and many you probably never even considered. The shows are an easy to understand course on investing and economics all in one package and you will learn a great deal by listening to them — promise:
Along with the shows above, I also recommend you download the e-book version of Harry Browne’s last investing book Fail-Safe Investing. The e-book is about $10 and is a concise work of Browne’s 40+ years of investment experience and advice. This book is a short read and very easy to understand. It encapsulates Harry Browne’s very simple asset allocation strategy which actually is derived from a very sophisticated understanding of economics. His approach offers a level of diversification and safety not seen in any asset allocation approach I’ve ever run across (and I’ve seen a bunch of them):
If you want a physical book, then you can pick one up below. It is the same as the e-book mostly. However, the e-book is more up to date. In the e-book he recommends using an index fund for your stock exposure and avoiding all active funds as may have been mentioned in the hard copy version which was published in 1998 along with his earlier books:
Fail-Safe Investing Hardcopy Book
Next up you have Browne’s 16 Golden Rules of Financial Safety. If you follow these rules religiously, along with the Permanent Portfolio allocation, you will have a tough time losing your life savings:
16 Golden Rules of Financial Safety
Still want more? You may want to read these articles that I wrote which talk about some more core concepts.
The Permanent Portfolio Allocation
Permanent Portfolio Historical Returns
Between Browne’s radio shows, books and the extra information I wrote you’ll have a thorough understanding of this approach to investing so you can make an educated decision if it is right for you.
If that’s still not enough then you can read articles with the “permanent portfolio” tag on this site:
Permanent Portfolio Tagged Articles
Between the radio shows, Browne’s books and the FAQs you will know just about all there is to be known about implementing the Permanent Portfolio strategy. These basics will provide a solid foundation to grow and protect your money.
Gear Review – Fenix LD01 Flashlight (also Swiss Army Hercules and Swedish Firesteel)
Feb 1st
Like most nerds, I like having some type of pocket tool kit on my person at all times. Whether a Swiss Army Knife or Leatherman, it comes in handy so often that I just can’t imagine traveling anywhere without one. But suppose you have to disassemble your car or defuse a bomb MacGuyver style in total darkness? You need some light and you need the light detached from your tool kit so you can see what you’re doing while using the tool itself.
Squeeze Lights Run Out of Juice
For many years I carried a Photon squeeze light
The Fenix Has Landed
While only weighing slightly more than the smaller squeeze lights, the Fenix offered far greater output and operating time with multiple brightness modes. Further, it was also easier to hold and the aluminum housing is very tough. While I’ve never had a problem with wet weather with the squeeze lights, the Fenix LD01 feels much more solid and weather resistant with a smooth rotating switch action and sealed compartment for the AAA battery. I’ve used it in many weather conditions to include pouring rain without any problems.The LD01 features a powerful 80 Lumens output on the highest setting. The light output is easily as strong as a much larger conventional lightbulb flashlight. I’ve lit up objects 100+ feet away without any problem. On the lowest setting the light is comparable to the squeeze lights but the beam is better focused and more usable thanks to the built in reflector. There is also a medium setting which is a nice compromise in brightness vs. battery life. The light settings are quickly adjusted by turning the front bezel. When turned on initially it will default to medium power, the second twist gives you low power and the last twist gives you high power. Twisting a final time turns the light off. There are no buttons on the light and the entire system is controlled by twisting the head. This is also how you replace the battery. It’s a rugged and simple design and stays off when in your pocket and stays on when you want it to be on. The kit also includes a pocket clip, attachment ring and spare O-ring in case the included one wears out.
In terms of battery life, on the highest setting the manufacturer claims a one hour burn time with a single AAA battery, 3.5 hours on the medium setting and 11 hours on the lowest setting. I’ve not run a battery out yet despite having used mine for many hours already. Because the light uses a standard AAA battery, you can find replacements in stores that may not stock button batteries or specialty photo cells that other lights may use.
The light itself is about 3″ long and 1/2″ in diameter. Here it is in comparison with a standard sqeeze light, the little brother Fenix E01
The LD01 packs a lot of light in a small package.
I had some photos of just how strong this light is, but honestly the images just can’t capture it well and it is so bright that it was causing the camera to underexpose. 
Let’s just say that a full size 3 D-Cell traditional bulb flashlight is about 80 lumens and weights over 30 oz. This light that fits in your pocket and weighs perhaps two ounces is just as bright. Of course there are some lights that are brighter, but for the size this one is really hard to beat. I own several Fenix lights now and have never had one fail me after some pretty rough use (as opposed to some others which failed soon after I bought them).
The little brother Fenix E01
Knife in the Photo
For those that are curious, the knife in the photo is the larger Swiss Army Atlas model with a locking blade, pliers and saw. I don’t think they make it any more and the Swiss Army Hercules
model (the Swiss are on some strongman theme here) seems to be a close replacement (it has added scissors which are always handy). These models of knives are longer than the standard sized Swiss Army knives, but I do a lot of hiking and having a longer usable saw and knife blade is a great feature for cutting branches and other field tasks. The saw on this knife beats the snot out of those cheesy cable saws that always break after about five minutes worth of use. It also works better than many other pocket knife saws I’ve used and can cut branches up to 4″ or so and even 2×4s with little effort (and no, I don’t endorse going around hacking branches off of trees when out in the woods). The locking blade gives the knife extra safety against ham handed accidents that could close it on your own fingers. For what it’s worth, I’ve owned many original Victorinox Swiss Army brand knives through the years and have never had any of them break on me after some hard use (something I can’t say about most of the clones).
A Great Firestarter
The orange thing on the knife is a Swedish Firesteel Mini
A Great Piece of Kit
But back to the flashlight. Fenix is a relatively new manufacturer, but they are making some really good products and the LD01 is a great piece of kit. It puts out an amazing amount of light in a small package that fits in your pocket. I think it’s a great value for the quality and function and can easily replace much bigger units for a fraction of the weight.
Book Review – Books on Risk (and two podcasts)
Jan 28th
A theme you’ll hear on this blog about investing is the idea that the markets are not predictable. You may believe that I’m referring to the idea that you can’t predict returns on investments ahead of time and that’s partially true. The other part though relates to extreme risks that sweep through the markets in unpredictable ways with unpredictable results.
Aside from standard market risks, when you look at your investments it’s also important to always ask yourself: “What if I’m wrong?” Because, odds are, you will be wrong eventually. It’s just a question of degrees on how wrong it will be: A little or a lot.
The Permanent Portfolio has protection against unpredictable market risks and being wrong. If you’re wrong, you’re not going to be wrong so much that you take a crushing blow to your portfolio (because your asset allocation is widely diversified in relatively small chunks). We should also understand though that all investments have risk. Without risk, you will not get rewards. So risk must be taken to grow a portfolio, but it must be done with specific goals in mind. We need profits, but we also need defenses against an unknown future.
In this light, I’d like to share with you some books and podcasts that I think really hit at this problem of risk, uncertain futures and protecting yourself against being wrong. They may help you understand why diversifying and eliminating unnecessary risks in your portfolio is so important and why being wrong does not have to be fatal if you handle it correctly.
First there is John Allen Paulos and his book A Mathematician Plays The Stock Market. This 2003 title is one of a series of excellent books written about his worldly observations as a mathematician. In this case, the book details his own personal story of losing money in the stock market and how uncertainty rules. It’s an interesting look at many concepts you see in the investing world with respect to stocks vs. bonds, efficient market hypothesis, chaos theory, etc. And, best of all, it’s a very easy and fun read with almost no math but high level explanations of many concepts with real-world examples. He has a number of books written in his “A Mathematician” series exploring everything from innumeracy in society to his experiences investing (and losing) lots of money in Worldcom as he discusses in this book. The bottom line is that risk is real, markets are random, and trying to beat it can be very costly. His dedication reads:
To my father, who never played the market and knew little about probability, yet understood one of the prime lessons of both. “Uncertainty,” he would say, “is the only certainty there is, and knowing how to live with insecurity is the only security.”
John Allen Paulos – A Mathematician Plays the Stock Market Dedication
Now that’s a dedication I can get behind! That is the core philosophy of how the Permanent Portfolio is designed to operate.
Next, there is Nassim Nicholas Taleb and his series of books on chance. First there was Fooled By Randomness followed by The Black Swan. Both of these books explore the idea of unpredictability in the world. While his advice is largely being linked to finance today (he was a former trader), his observations come into play in many areas of life. His book, The Black Swan, pre-dated the 2008 crash involving Fannie Mae but said this in one of his footnotes:…the government-sponsored institution Fannie Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events “unlikely.”
Nassim Taleb – The Black Swan Pg. 225
I’d say he certainly called that one correctly.
I also think you’ll enjoy these two podcasts from Nassim Taleb. One recorded in 2007 talks about his book The Black Swan. The second was recorded in 2009 after the market meltdown as an after-action report on what he had written and said before:
Taleb on Black Swans – April 30, 2007
Taleb on the Financial Crisis – March 23, 2009
One thing about Taleb is while he has disdain for most fields of economics (and especially the very silly Keynesians), he does have an affinity for the Austrian Economic School and their dislike of the over-application of mathematics in economics for what is, essentially, a human behavioral problem (aka. scientism). Why does this matter? For one, you cannot model risks accurately with standard statistical methods because human behavior is not predictable. Secondly, Harry Browne was a firm believer in Austrian Economics and the Permanent Portfolio design, at its absolute core, is based on the Austrian School’s theory on monetary cycles (a lengthy topic for another day) and embracing unpredictability in the world. In fact, I think that one of the reasons the Permanent Portfolio is good at dealing with market risk is because the Austrian Economics school is right about a great many things. This outlook helps to drive the portfolio down the right path over time avoiding serious pitfalls and dangerous assumptions about the future.
With these three books and two podcasts you will understand more about market risk than most professional investors and economists. Seriously. Combine that with Harry Browne’s podcasts, and his own previous books, and you’ll be well versed in the dangers of the unpredictable in the investing world and how to position yourself to deal with them.
Strategize, analyze, optimize and lose money all with one tool!
Jan 25th
I just saw an ad on TV talking about TDAmeritrade’s new options trading tool. They had some hipster guy walking in with a bag full of groceries in his hand. He was very serious and lecturing about the need for strategy in trading. They then cut away to some other beautiful people talking about keeping up with the market first thing in the morning and watching some blinky lights on the computer monitor giving them information.
One lady looked intensely at a “heat map” that showed where the money was going that day. I thought she was playing Tetris but the commercial says this is part of the trading strategy. It looked more like a video slot machine, which I suppose it actually is in some respects, but it certainly wasn’t investing.
Well, it was just too much to bear so I took a quick look at what other pretty charts their software can make from their website above.
The “Heat Map” feature. Here you can see where the hot money for the day is going in the market so you can be the chump jumping in after everyone else and be left holding the bag:
TDAmeritrade's "Heat Map"
This chart is a representation of your money being sucked down a black hole by doing options trading:
Options Black Hole
The website says: “See a clearer picture of the potential profit or loss of your options trades.” Is this chart clear to you:
Options Huh?
Here’s a chart they left out:
Bad Option
That’s my projected returns on $100 for most options traders.
If the information in TDAmeritrade’s “heat map” and other technical indicators was worth anything, why would they be telling it to you? Why wouldn’t they use their secret insight into the markets and make a killing themselves? They’ll just have to be happy with their per-trade commissions while their options trading customers are pulling down the big bucks. I guess they’re just being nice guys.
I know people who lost their life savings trading options. Stay far away from this stuff.
FerFal Responds About Gold and Real Estate
Jan 21st
The previous book review of The Modern Survival Manual: Surviving the Economic Collapse covered the insider’s view of the Argentina financial crisis of 2001 and what happens when a society sees their currency lose more than 2/3rds of its value in a short period. It was an interesting read with unique insights into economics and sociology that you just won’t find in a standard textbook on the subject.
Now, I’m impartial to investment assets and don’t believe in extremes. I had some questions along the lines of going to extremes in investments and wrote to FerFal (Fernando – author of the book above) about his views having lived in a time when extremes did happen in his country. He gives his thoughts below.
On extremes in investing in gold (100% gold vs. not owning any gold) and real estate:
Extremes are bad, and I know what you mean. There’s people that believe anything other than gold is worthless and others that state “When the world ends I’ll trade an egg for a bar of gold!” You can only roll your eyes and think ok buddy, you sit there waiting for doomsday while I live in the real world.
I’ve noticed that both my father and grandmother have one thing in common. Grandma was a farmer in Spain, when she came to Argentina she started a successful bakery shop, lost their savings several times for many reasons, inflation, change of currencies, takeovers, etc.
My father is an accountant, he worked in banks most of his life, was on the board of directors of bank Boston in Boston, Massachusetts, practically lost the money he had to put into his retirement fund in Argentina.
The thing they both have in common? After a number of economic changes, inflation and corralitos of various kinds, the only thing both of them have left were their real estate investments. Those survived better than money in the bank, and unlike the almost useless retirement plans, the rent will be what really allows them to retire and live well.
Thought it was worth mentioning. I consider real estate an important part of one’s portfolio as well.
FerFal brings up a point that I hope to explore more in the future. I believe strongly that investors should have what a poster at the Bogleheads forum “chicagobear” aptly called a “have money” and a “make money” side of their portfolio.
Inside the Permanent Portfolio you have four assets: Stocks, Bonds, Cash and Gold. Stocks and bonds are your “make money” portfolio as they pay interest, dividends and have capital appreciation. Cash and gold are more of your “have money” portfolio because they pay little in interest (such as cash) or have no interest or dividends like gold (but may have capital appreciation). However these “have money” assets have tremendous ability to ride out very bad markets when your “make money” assets are doing poorly. The “make money” and “have money” halves of the portfolio work together to lower volatility and provide good returns.
But FerFal brings up another interesting asset: Real estate. It combines the aspects of “make money” by giving you an income stream from rent but also is a “have money” as it is an asset that can’t be inflated away easily.
For the Permanent Portfolio, Harry Browne cautioned against using real estate as an investment as he considered it speculative in nature. In many respects this is true. However if you own rental property you do have potential to make money if you choose a good location, have good renters, can manage maintenance costs, have a good management company, etc. This is the speculative risk part. It could work out, but there is risk that one or more things could happen to make it not profitable.
What about Real Estate Investment Trusts (REITs)? You get the high income streams from owning real estate, but don’t get the calls at 3AM in the morning about a leaking roof. REIT index funds own a wide variety of companies that have exposure to malls, office buildings, public storage companies, etc. So you get geographic and industry diversification as well. However, by owning stock you don’t own the actual property itself which may defeat the purpose of real estate entirely as a hard asset like gold. Yet, for investors that want to have some real estate exposure, but don’t want the hassle, it may be an acceptable trade off.
As it is, in terms of “make money” and “have money” side of things, real estate seems to straddle the fence. It combines elements of stocks and gold investing (along with both of their risks). It is a hybrid asset. If owned directly it can provide inflation insurance that stocks and bonds may not. Yet it can also provide an income stream that gold and cash cannot. With REITs you give up the direct ownership, but they do provide a nice income stream which is hard to ignore.
Are there risks? Of course. There are risks involved just as you’d suspect and they need to be managed effectively. For instance, property management seems like one of the biggest headaches for real estate investors (but not for REIT owners). In Argentina FerFal handles it this way:
About managing real estate, I’ve found that in most cases its better to spend a couple bucks each month and let a real estate agency collect the rent and argue with the people you rent to.
In few cases, you find the right person and things run smoothly, most often it doesn’t and a middle man like the real estate agency collecting rent and making the calls if they get behind saves you time and lots of headaches. Besides, they [the renters] pay better ( pay when they are supposed to) when they dont have the actual owner in front of them to cry to.
Never heard of owning real estate through stocks [REITs]. Here, most people manage their own property, with a real estate office always taking care of the contract ( very important to have a good contract) and some have real estate managers like the ones I mentioned.
Here its important to be good at haggling like I say in the book. I’ve had very serious, suit wearing real estate agents cut down their managing asking fees down to 10% of what they where originally asking for. It’s important to know the market, know what a realistic asking fee is.I’m a nice guy and dont like pushing people ( people that come up with excuses for not paying rent) but like everything else, you learn little by little, know when someone really just needs a couple more days, or when he’s playing with you. Again, best thing is to have someone else take care of it, specially if you’re not planning on having much time to chase people around to get paid.
Here in the states many rental property owners do use management companies and this does seem to lessen the stress. They manage the renters, the maintenance, etc. There are some potential pitfalls to navigate though (such as the management company overcharging you for services and maintenance, carrying insurance, etc.). So rental property ownership is far from a sure thing and will take some work on your part to choose wisely.
However if you think you have the stomach for it, rental properties may be a consideration if you’re looking to have exposure to hard assets but also want that asset to deliver an income stream. BTW. I don’t think time shares fall into this category. I think time shares are the kind of investment made to be sold, not bought. Also, when we’re talking about owning real estate I feel we’re talking about property where you own the note yourself and not taking out loans to buy properties and risk you can’t make the payments. Taking out large loans to buy property other than your own home is a violation of Rule #7 of the 16 Golden Rules of Financial Safety.
If you don’t want to deal with any of these risks, or don’t have funds to buy additional real estate outside of your home, it may make more sense to look into a REIT fund like Vanguard’s REIT index (Ticker: VGSIX) or the iShares Realty Majors Index (Ticker: ICF). If you are eligible, the TIAA-CREF Real Estate Fund has an excellent reputation as well. These options provide inexpensive exposure to real estate with the trade off being you don’t own the property itself. If you are comfortable with that, the REIT funds above provide an easy way to get real estate exposure. They also have the other advantage that they are very liquid. Meaning that you can sell them in 60 seconds to get your funds instead of waiting days, weeks, months or even years to unload a physical property plus realtor commissions.
In terms of asset allocation, real estate is in the variable portfolio side of the house. Basically, only do it with money you can afford to lose. Also realize that if you own a broadly based stock index fund like the Total Stock Market you already own REITs. You just don’t own a lot of them in proportion to everything else.
Also remember that real estate does have risk just as all investments do. It’s just a question of diversifying these risks against all your other assets to reduce losses if they should show up. REIT funds dropped over 65% from their 2007 highs to their lows in 2008 as a recent example. And despite what realtors always claim about physical property prices, many areas experienced significant price drops in real estate that could take years, or decades, to recover. Yet, with the real estate bubble clearly popped in the US this asset could be a reasonable buy for someone looking to diversify a little of their play money and have some protection against unexpected events as well.
Thank you Fernando for answering my questions. Please be sure to visit his blog where he provides information on many topics.
Book Review – The Modern Survival Manual: Surviving the Economic Collapse
Jan 15th
Formerly, I was in the Internet security field and part of my work was as a security auditor hired to break into computer networks as well as doing network attack tool development. So, it comes naturally to me to look for ways in which something may not go according to plan and deliberately push further until it breaks in unexpected ways. That’s what security auditing is at its core.
Therefore, as my research in investing and economics widened, I thought it would be an interesting exercise to depart from looking at optimistic scenarios and instead look at financial disasters. I already saw all the unrealistic hockey stick charts where people project their 15% annual returns for the next 50 years and retire by buying a Carribean island somewhere. Instead, I wanted to see how things worked when the train really sailed off the tracks. What assets held up, what didn’t, how long did it take to recover, etc. And, as it turned out, one of the more recent financial disasters was Argentina in 2001. During that year, the Peso was devalued from 1:1 with the US Dollar to a market exchange rate peaking around 4:1 Pesos for US dollars (that’s around an 80% loss of value kiddies). In the end, the overall damage to Argentina’s citizens was to lose more than 2/3rds of their wealth almost overnight as the government implemented extreme policies that made the situation worse.
Inflation in Argentina 2002 - Wikipedia
Now it’s one thing to read about losing so much of one’s life savings under an extreme event like this, but it’s another thing to actually live through it. Yet, during my reading on the subject it just so happens that I came across a report from an Argentinian Architect student (now Architect Professor) living in Buenos Aires:
Lessons from Argentina’s Economic Collapse (Read all four parts at your leisure, it’s well worth your time)
He also published a book (and keeps a blog) that is a collection of his advice on what really happens when an industrialized country hits a very bad economic climate.
Unlike other survivalist-type books that operate under the idea that all you need is a bunker and some bullets, this book actually covers realistically what to expect. It details the events of 2001 and the aftermath. This includes the very high unemployment, crime and poverty (as high as 57% under the poverty line at one point). He also talks about what things you probably should have to prepare for this situation (hint: It does not include an armored personnel carrier, but does include things like LED headlamps and a moderate amount of food supplies to ride out some initial disruptions). Finally, he goes into great detail about what happens in a country when a currency really does hyper-inflate. For instance, did you know that vendors and banks will happily buy gold and silver but are not interested at all in bartering with ammunition? Do people really think you’re going to walk into a store and say:
[CraigR]: I know that pack of Coca Cola costs a half-dozen .308 caliber, but all I have are 10 rounds of .338 Lapua Magnum. Can you give me five 30-06 caliber softpoints for change? Oh, and I’ll take two gallons of napalm. I need to refill my flame thrower because I have a death match at the Thunderdome tonight.
Ignoring the fact for now that gold can diversify a portfolio without any financial disaster at all, one of the criticisms of gold is that for financial Armageddon some say you’re better off with bullets, razor blades, etc. However if you read accounts of what actually happened in developed countries like Argentina and Iceland it’s a total myth. In Surviving the Economic Collapse the author goes into detail about how and why barter systems must fail eventually and how they did exactly that in Argentina. As it turns out, gold and silver in fact are great assets to have once you move beyond the basic sustenance items for your family. People are always happy to exchange gold and silver for either real items or local currency. Moreover, there is not some magic button that’s pushed where everyone turns into rabid murdering lunatics roaming the countryside looking for the razor blade bazaar to trade their wares. In the book the author explains:
Survivalists spend countless hours discussing what product to stock specifically for post SHTF [craigr: Shit Hits The Fan] barter. Tools, needles, candles, shoes, and sometimes the most ridiculous suggestions are considered the wisest statement. This or that item, ‘will be worth its weight in gold’.
Well, no.
Only gold is always worth its weight in gold. Bar none.
- FerFal – Surviving the Economic Collapse
And on bartering with ammunition:
How about Uncle Bob’s ammo stash. He read somewhere that .22 Long Rifle would be the new currency after the SHTF, and the best barter item, so he bought a few 500 round packs.
Again, his surprise was big when the egg guy told him that he didn’t need .22 ammo, he doesn’t even like guns, he simply needs a plumber.
Since he was at the ‘Barter Club’ he checked around to see what was the actual market for his .22 stash, and was sort of disappointed by the few offers he got. Seemed that each person wanted a different item, and those that were interested…they looked like people from the wrong walk of life, and Bob wasn’t sure he wanted to give ‘them’ ammo. Ammo that would end up being used in delinquent’s guns and possibly against him and his family.
- FerFal – Surviving the Economic Collapse
Besides the above, he covers many other topics with an insightful outlook. Here’s a short list:
- Common myths about what happens during an economic crisis
- Why preparation is a good idea
- How to prepare
- Importance of being physically fit
- Crime and unemployment
- Risks of living in rural areas
- Risks of living in the city
- Security in your home
- Security in your vehicle
- Gear to keep on your person, car and at home
- What kind of gun to buy first for protection
- Self-defense skills – unarmed
- Self-defense skills – armed
- Finances under economic calamities
- Making money in bad economies
- Bartering
- Gold and other foreign currencies in a crisis
- How to expect your government to respond
- Bribing, looting, riots and relocating
- Having multiple plans in case things don’t work out where you are
Lastly, the author reflects a bit on what he’d do differently if he knew what was going to happen ahead of time. This involves what items he’d buy, what he’d avoid, how he’d diversify his money and other small but important details that you may not have considered.
Overall I really enjoyed this book for the practical details inside of a financial crisis and what really happens as opposed to theories. The author apologizes for the writing in the book as English is not his first language, but I found his writing style humorous and blunt with no sugar coating. From his descriptions and acknowledgements of what he did right and wrong you can tell that he’s someone with (unfortunate) experience in these matters.
For $24.95 I think this is a great buy. It’s a book that offers practical advice for anyone who wants to be better prepared in case any type of emergency should arise that affects where they live whether natural or man-made. I give this book five stars. It’s a great read.
Which Asset Will Do Best?
Jan 12th
Fail-Safe Investing
I get asked from time to time about what asset class in the Permanent Portfolio is going to do best. Usually this is in the context of someone wanting to start investing in the Permanent Portfolio but they don’t want to buy the stocks or the bonds or the cash or the gold because they feel one or all of them are too expensive.
Well, here is a snippet from Harry Browne’s investment radio show on October, 24th, 2004 where he answers the same question from a listener about not wanting to buy Asset X because it’s too expensive (in this case stocks and bonds). Harry Browne lays out his experience on the matter in this five minute long clip:
Harry Browne – Which Asset Will Do Best
It’s now 2010 and this show was recorded in 2004. Let’s see what happened if the caller just took their money and dumped it into the 4×25 Permanent Portfolio split instead of trying to guess what the market would do:
2004-2009 annualized return of each individual asset class (rounded to nearest tenth from Simba’s Spreadsheet*):
Stocks: 2.5%
Bonds: 5.8%
Cash: 2.5%
Gold: 17.5%
Annualized return for 4 x 25 split portfolio: +7.5-7.8% (depending on bond index used)
We know gold did well after the fact but don’t know how it will do going forward. Back in 2004 it was a rare bird who was telling people to buy gold and many analysts still liked stocks as they were recovering from the 2000-2002 crash. Indeed, from 2004-2007 stocks were up about 10% a year. In fact, investors who thought stocks were a bad bet in 2004 were probably feeling pretty left out by 2007 after seeing them go up so much in price. They likely were tempted to move their money into stocks at that point – just in time to catch the downswing. Then, we have 2008 where bonds went up over 30% in a single year due to the market panic and handily beat stocks over this 2004-2009 time period as well. On top of all this, consider that the nearly 8% annualized return also included the horrible 2008 performance for stocks and poor 2009 performance for the bonds. If we go year by year in fact, returns for these assets will be all over the map from double digit boom years to double digit down years. Yet, there was still a reasonable profit made.
This illustrates why investors should always keep a balanced and diversified portfolio and not try to guess what the markets are going to do. In this case, the listener above would have pulled down about 8% a year doing pretty much nothing but holding a diversified portfolio and they would have rode through the 2008 crash without any damage. This would have been a far safer portfolio than making a concentrated investment in a single asset like gold or stocks regardless of how the actual bet turned out over the past – A bet that could blow up just as easily going forward.
Harry Browne’s archived shows contain lots of wisdom and knowledge like the above that have proven to be solid and dependable. I advise those looking to implement the Permanent Portfolio strategy to take the time to listen to Harry Browne’s radio shows as well as buying his book Fail-Safe Investing. I don’t make any money from this and it’s less than 10 bucks. This is an outstanding way to educate yourself on the approach and see if it is something that will work for you. Even better, his shows are timeless and you’ll probably hear people calling or writing in with many of the same questions you have. It’s entertaining and educational to listen to what people were saying and worrying about six years ago and how little it’s changed. Moreover, it helps reinforce the idea that the future is not predictable and investors should use strategies like the Permanent Portfolio that embraces this uncertainty so they can grow their money safely.
* I use historical data to disprove investment concepts as history cannot show you what returns will be going forward. I’d advise anyone using backtested data to not fall into the trap of building optimized portfolios that worked in the past. The past does not repeat and highly optimized and data-mined assets that outperformed before may not do so in the future.